Spotting talent

Madan Padaki

Belief in the idea and faith in the team motivated Madan Padaki, Murlidhar S and Mohan Kannegal to risk their all in MeritTrac.

1. DEVELOPING THE IDEA

The roller-coaster growth that accompanied MeritTrac, a skill-assessment company, could beat any thriller. The developments that led to the company’s boom, bust and boom were so fascinating that business management school INSEAD, Singapore, has compiled it as a case study on entrepreneurship.

It all started when Bangalore-based Madan Padaki visited his home town during the dotcom boom in May 2000. “Entrepreneurship was in the air. Every good idea had the backing of a venture capitalist (VC). It was all so heady,” says Padaki, who was in the midst of setting up BFL Software’s office in Japan.

Mohan Kannegal

His friends, who had set up a software development company, had rejected an offer to create a software to evaluate potential programmers. But Padaki realised the opportunity in the idea. “Companies had to maintain large questionnaire banks to test new employees. My 15-day leave turned into a brainstorming session,” he says.

Murlidhar S

The idea was to set up a one-stop skill-assessment centre that would provide information technology (IT) companies with an end-to-end solution in testing the skills of new employees.

Friends and family offered support. Padaki involved his brother-in-law, Murlidhar S, a national sales manager with Birla 3M and Mohan Kannegal, a batchmate from SPJIMR, who was employed with Citicorp Overseas Software. In June, Padaki was back and met the head of human resource (HR) at Wipro for a validation of the idea. “The response was very positive and we were ecstatic,” says Padaki.

2. GETTING STARTED

The beginning wasn’t auspicious. Padaki had to resign as his office refused to give him a sabbatical. The other two decided to stay put with their jobs. “I realised the enormity of my action a day later. Here I was with no funding, no client and no job to fall back upon,” he says. To survive, he plunged headlong into scouting for a customer.

There were more hardships to follow for the new entrepreneurs. VCs rejected their business idea, as it was not based on a rupee-dollar model. “We were targeting Indian IT companies and not the US ones,” says Kannegal. They hit pay dirt with Wipro, which was planning a recruitment drive. Since HR was not his forte, Padaki tied up with Vijay and Roopa Padaki of P&P Group, experts in organisational development.

The group became MeritTrac’s knowledge partners. The trio realised that in order to fortify their business, they needed the endorsement of experts. To create an advisory board, they approached V Natarajan, an author of books on assessments, Pankaj Jalote, a professor at IIT, Delhi, and columnist Mukul Sharma. However, VCs still kept rejecting their proposals and by August 2000, the dotcom bubble had burst.

3. ENTRY OF ANGEL INVESTOR

Thankfully, some business trickled in and by November, they had four customers, a small team, temporary office space and an annual revenue of Rs 4 lakh.

Things started looking better as T Ranganathan, a businessman with interests in agro business, decided to take up 27% stake in MeritTrac for Rs 1 crore. They closed the first 18 months with a turnover of Rs 15 lakh and even met all the targets for the angel investor to release the next tranche. In the mean time both Murlidhar and Kannegal quit their jobs and formally joined MeritTrac.

4. THE DEBACLE

Most IT companies put a freeze on hiring following the dotcom meltdown and the 9/11 attack. For MeritTrac it spelt disaster. While monthly expenses had escalated to Rs 2 lakh, revenues were all drying up. To top it all, the angel investor suffered losses in his business and withdrew from funding.

“I was shocked. With just Rs 3 lakh in the bank, our survival was at stake” recalls Murlidhar. Adds Kannegal: “We couldn’t pay the salaries to our 12 employees but we promised to reimburse them adequately when business picked up. Thankfully they stayed on.”

The team plunged headlong into work with Padaki cold calling 40 companies in a day. They found a client in PCB, a hardware manufacturing company. “For three months, it was our only client and it helped us meet our basic expenses,” says Padaki.

5. GETTING BACK ON TRACK

In July 2002, they got their first BPO as a client. By October, they had earned enough to pay back their employees. “We closed the year with a net profit of Rs 6 lakh,” says Murlidhar. But MeritTrac’s worries were far from over.

Since the company works on a system where the revenue comes in only 45-60 days after a project is completed but the expenses have to be borne upfront, there was a shortage of working capital every month. “To meet fresh contracts, we had to invest larger amounts in centres, test administrators, etc,” says Padaki. The three co-founders were digging into short-term personal loans and borrowings to keep the business going. The team spent 2003-4 fighting a cash battle, and had to temper their euphoria at winning sales orders with the necessity of paying salaries late.

6. SCALING UP

In 2005, when Ashish Gupta of Helion, a VC firm, joined the company’s board, MeritTrac’s working capital requirements had gone up substantially and they could no longer make do with personal loans. While Gupta invested a small sum, the company also signed a Rs 16.5 crore private equity deal with HAV2 (Mauritius), an investment arm of HSBC PE.

According to them, the business has been growing at an astounding 200% a year since 2003. “Currently we test over 60,000 candidates a month,” says Murlidhar. Companies like ABB, Accenture, Adobe, GE, Google, HAL, ICICI, Intel, ITC, UTI Bank, among others are their clients. The team is still not breathing easy. “We must make the most of the growth phase,” says Padaki.